Jabil Circuit, Inc. — Fiscal 2011 First-Quarter Form 10-Q
Reporting period: Three months ended November 30, 2010; filed January 7, 2011. The filing covers Jabil Circuit, Inc. and subsidiaries, a global electronics manufacturing, design and product-management services provider operating in 22 countries. Effective September 1, 2010, the company reorganized into Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS).
Financial Performance and Position
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net revenue | $4.082 billion | $3.088 billion | +32.2% |
| Gross profit | $310.6 million | $231.8 million | +34.0% |
| Gross margin | 7.6% | 7.5% | +10 bps |
| Operating income | $156.0 million | $66.3 million | +135.4% |
| Operating margin | 3.8% | 2.2% | +160 bps |
| Net income attributable to Jabil | $106.7 million | $28.3 million | +277.1% |
| Diluted EPS | $0.49 | $0.13 | +0.36 |
| Operating cash flow | $(82.7) million | $74.3 million | Declined $157.0 million |
| Capital expenditures | $101.3 million | $38.0 million | +166.8% |
Segment revenue was $1.395 billion for DMS, $1.164 billion for E&I, and $1.523 billion for HVS. Segment income totaled $181.9 million, compared with $106.5 million in the prior-year quarter. Foreign-source revenue represented 86.4% of total revenue, and the five largest customers represented approximately 46% of revenue.
At November 30, 2010, cash and cash equivalents were $630.2 million, compared with $744.3 million at August 31, 2010. Total assets were $6.384 billion and total equity was $1.707 billion. Inventories increased to $2.158 billion from $2.094 billion, while trade accounts receivable declined to $1.184 billion from $1.408 billion.
Total notes payable and long-term debt were $1.298 billion at November 30, 2010, compared with $1.186 billion at August 31, 2010. Current maturities were $198.9 million. The company issued $400 million of 5.625% senior notes due 2020 and used the proceeds primarily to repay the term portion of its credit facility and reduce foreign asset-backed securitization borrowings.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger demand from existing customers, new customer and program wins, and improved end-market conditions.
- Gross margin improved modestly through better capacity utilization, productivity gains, cost control, and increased DMS mix.
- Operating income benefited from higher gross profit and the absence of the $15.7 million loss on disposal of a subsidiary recorded in Q1 FY2010.
- Restructuring and impairment charges fell to $0.4 million from $3.4 million.
- Interest expense increased to $22.2 million from $20.1 million, primarily because of the new senior notes.
- The effective tax rate decreased to 20.4% from 37.2%, principally due to the prior-year sale of the French subsidiary and the geographic mix of earnings.
- Operating cash flow turned negative because of a $150.1 million inventory increase, a $139.8 million reduction in accounts payable and accrued expenses, and higher prepaid and other current assets.
- The company adopted new financial-asset transfer guidance. Its principal receivables securitization program was amended during the quarter to restore sale accounting; $485.9 million of receivables had been sold at November 30, 2010, including $218.8 million recorded as a deferred purchase-price receivable.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2011 capital expenditures of approximately $375 million to $425 million, primarily for new-business equipment, DMS process technology, maintenance, and information technology.
- Management stated that cash, available revolver capacity, receivables programs, and operating funds were expected to be adequate for the next 12 months, while noting that several receivables facilities expire between March and November 2011 and may not be renewed.
- The company expected to continue declaring quarterly dividends of a similar amount, but future dividends remain discretionary. The Q1 dividend was $0.07 per share.
- The 2009 restructuring plan was expected to produce approximately $55 million of annualized savings; management reported approximately $50 million of cumulative annualized savings realized by the end of Q1 FY2011.
- The IRS proposed approximately $69.3 million of additional tax for fiscal years 2003–2005, before subsequent tax attributes, plus potential interest and penalties. The company disputes the proposed adjustments and recorded no significant additional liability for the matter during the quarter. Similar claims for later years could materially affect results.
- Key risks include customer concentration, short-term and volatile customer commitments, component shortages and price increases, inventory obsolescence, international and foreign-exchange exposure, seasonal HVS demand, competition, credit-rating changes, debt covenant compliance, and dependence on receivables financing.
- Jabil reported compliance with its credit-facility and securitization covenants and concluded that its disclosure controls and internal controls over financial reporting were effective as of November 30, 2010.
Investor Verification Priorities
- Verify whether revenue growth and improved margins were sustained after the holiday-driven HVS season.
- Reconcile negative operating cash flow with earnings, particularly inventory growth, supplier-payment timing, and receivables-sale activity.
- Review debt maturities, the $1.0 billion amended revolving facility, covenant headroom, and the refinancing or renewal of receivables programs.
- Assess customer concentration and exposure to major customers’ internal manufacturing, demand changes, and financial condition.
- Monitor the IRS tax dispute, potential later-year assessments, interest and penalties, and the company’s uncertain-tax-position liability.
- Evaluate whether the planned $375 million–$425 million of capital expenditures generates adequate utilization and returns.
- Consider the effect of component shortages, foreign currencies, tax incentives, restructuring execution, and seasonal demand on future margins and liquidity.